Moving Company Financials

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					E*TRADE Financial Corp. (ET)                                                  Daiva Tacionyte
Date:                       October 13, 2005     Consensus Estimate 06/05A 12/05E 12/06E
Sector:                        Financials        EPS                    $0.93   $1.06      $1.27
Industry:                   General Finance      P/E                    17.21    15.10     12.61
Current Price:                   $15.94          Long Term Growth Rate:              10.55%
52 Wk Price Range:           $10.53-17.71        Ratio Analysis    Co.   Indus.   Sector SP500
Ave. Daily Vol:                3,319,000         P/E (TTM)        17.21   18.47   15.15     20.18
Beta:                             2.96           P/S (TTM)        2.97     2.91    3.18      2.81
Market Cap ($million):           $5,913          P/B (MRQ)        2.76     3.59    2.33      3.78
Shares Out (million):             371            ROA (TTM)        1.19     3.58    2.61      7.59
Inst. Hold %:                    72.4%           EBO Valuation                               $8.50
Div Yld:                         0.00%           Recommendation:                  HOLD
Total Debt/Equity:                2.02           Stop-loss Price:                  $13.55
Member S&P 500?                   Yes                             Price     6-mo prob    12-mo prob
                                                 Target Price      $20        40%           58%

               Investment Thesis                                      Summary
                                                   Fundamental Valuation:
      Company’s stock is overvalued by               Bearish: With a discount rate of 14.39%, ET’s
       87.53%.                                        EBO valuation is $8.50, or 87.53% below its
                                                      current price.
      Company just acquired HarrisDirrect,        Relative Valuation:
       and is planning on acquiring online            Bearish: Most of the indicators are bearish and
       brokerage business from JP Morgan              indicate that ET is overvalued and risky.
       Chase & Co.
                                                   Technical Analysis:
                                                      Neutral/Bearish: Half of the indicators show
                                                      that ET is close to the Moving Averages and
      There is possibility of the market
                                                      signal line, but on the lower end. However, last
       overreaction to the fact that the              week’s closing price show an upward trend in the
       acquisitions will increase E*Trade’s           price.
       EPS.                                        Earnings Analysis:
                                                      Bullish: ET had only positive earnings surprises
      When compared to its competitors the           over a year. Moreover, the company had nine
       company is riskier investment than             out of nine revisions up, and no negative
       other similar companies.                       revisions for the past four weeks.

                                                   Analyst Recommendations:
                                                      Bullish: Analysts expect the stock to
      As indicated by the technical analysis,        outperform. However, there are few hold
       currently E*Trade’s stock price is             recommendations.
       below the 50 day Moving Average.
                                                   Institutional Ownership:
                                                       Not available.




                                                                                                   1
Company Summary

E*Trade Financials Corporation was established in 1982 and is based in New York City. The company
operates in two segments: brokerage and banking. 1 The brokerage part of the company includes customer
and proprietary trading, margin lending, and market-making activities. The banking part of the company
includes mortgages and consumer lending services, as well as asset management services that include
interest bearing checking accounts. 2

The customers’ base for E*Trade Financials is made up of retail, corporate and institutional customers.
Retail and corporate customers are offered the banking services, and institutional customers use brokerage
services. Moreover, in 2004 approximately 55% of the revenues were from retail customers, 40% were
from the institutional customers, and only about 5% were from the corporate customers.3 In other words,
about 60% of E*Trade’s revenues come from its banking operations, and about 40% of E*Trade’s
revenues come from brokerage services.

E*Trade is a global company that operates in such countries as Canada, Denmark, Germany, Honk Kong,
Iceland, Sweden, and United Kingdom. Also E*Trade has license agreements for E*Trade brand in the
following countries: Australia, Japan and Korea. The entire E*Trade’s foreign operations are operated
through the websites. 4

Competition and Strategy

The General Finance industry, in which E*Trade Financials operates, is highly competitive. Especially during
the past twelve months, when most of the major companies are merging or acquiring smaller companies in
order to reduce the potential threat of new emerging companies.

E*Trade Financials have both domestic and foreign competitors. However, the main competitors that
E*Trade faces are Ameritrade Holding Corporation (AMTD) and Charles Schwab Corporation (SCH).
E*Trade is the smallest of the three companies, but is similar in size with Ameritrade Holding Corporation.

 Ameritrade Holding Corporation and E*Trade both specialize in brokerage services via Internet, that is why
originally they were supposed to merge later this year or early in the beginning of the next year. The merger
could benefit both companies as they would not have to compete with each other and could have larger
customer base. However, Ameritrade decided not to accept E*Trade’s offer for a merger.

Moreover, another main competitor for E*Trade is Charles Schwab Corporation. This company focuses
more on Institutional and Business investments. In contrast to Ameritrade and E*Trade, Charles Schwab
does not concentrate primarily on brokerage via internet. However, Charles Schwab does directly compete
for customers and market share with E*Trade in the foreign markets such as Honk Kong or United
Kingdom.

The strategy that E*Trade use in order to be financially successful company is that they focus primarily on
large customers that have at least $150,000 in assets accounts. Moreover, as the companies in the industry

1
    www.finance.yahoo.com
2
    www.money.msn.com
3
    www.investor.reuters.com
4
    www.finance.yahoo.com



                                                                                                                2
merge and consolidate, E*Trade is following that path as well. Just recently E*Trade Financials has acquired
HarrisDirect that will add $60 billion in assets and about 600,000 new customer accounts. Next E*Trade is
planning on acquiring BrownCo that is part of JP Morgan Chase and Co. which will add another 200,000 new
customer accounts. This binge of E*Trade’s acquisitions is expected to give the company a 16.00%-21.8%
gain on earnings per share over the next twelve months. This shows E*Trade Financials ability to compete
with the competitors and ability to come back after the major planned merger does not work out.


Historical Revenue and Earnings:

                      Historical Revenue (in millions)                Historical Earnings (per share)
                 FY 05/12        FY 04/12        FY 03/12        FY 05/12        FY 04/12        FY 03/12
1st Quarter        601.5           573.2            453.5          0.24            0.23            0.06
2nd Quarter        618.5           542.3            534.2          0.27            0.31            0.03
3rd Quarter         NA             524.2            570.3          NA              0.21            0.17
4th Quarter         NA             586.6            625.3          NA              0.24            0.29
Total             1,220.0         2,226.3          2,183.3         0.51            0.99            0.55


Revenues have increased for the first two quarters in 2005 when compared to the earnings in
previous years. Earnings per share have increased substantially since the end of the fiscal year
2003. However, earnings per share for second quarter this year have decreased by 12.9 % when
compared to EPS of second quarter in 2004. This decrease in EPS can e attributed to the fact
that Ameritrade decided not to accept ET’s merger offer, as a result investors overreacted to the
news, which cause the stock price to drop. Moreover, E*Trade is expected to have EPS of 1.06
at the end of the fiscal year 2005, which would be multi year high for the company.




                                                                                                            3
I. Fundamental Valuation
PARAMETERS                           FY1       FY2      Ltg
EPS Forecasts                           1.06     1.28   10.55%            Model 1: 12-year forecasting horizon (T=12).
Book value/share (last fye)             6.01                                          and a 7-year growth period.
Discount Rate                        14.39%
Dividend Payout Ratio                 0.00%
Next Fsc Year end                      2005
Current Fsc Mth (1 to 12)                 10
Target ROE (industry avg.)           16.01%

Year                                   2005      2006     2007     2008         2009       2010        2011       2012   2013    2014    2015    2016
Long-term EPS Growth Rate (Ltg)                         0.1055   0.1055       0.1055     0.1055      0.1055
Forecasted EPS                          1.06     1.28     1.42     1.56         1.73       1.91        2.11
Beg. of year BV/Shr                    6.006    7.066    8.346    9.761       11.325     13.055      14.966
Implied ROE                                     0.181    0.170    0.160        0.153      0.146       0.141

(Beg. ROE, from EPS forecasts)         0.176    0.181    0.170    0.160        0.153      0.146       0.141      0.145   0.149   0.153   0.156   0.160
(ROE-r)                                0.033    0.037    0.026    0.016        0.009      0.003      -0.003      0.001   0.005   0.009   0.012   0.016
(1-k)*(ROEt-1)                         0.000    0.176    0.181    0.170        0.160      0.153       0.146      0.141   0.145   0.149   0.153   0.156
                                       1.000    1.176    1.390    1.625        1.886      2.174       2.492      2.844   3.256   3.741   4.311   4.985
                                       0.033    0.044    0.036    0.027        0.017      0.006      -0.007      0.003   0.016   0.032   0.054   0.081
                             0.144     0.144    0.144    0.144    0.144        0.144      0.144       0.144      0.144   0.144   0.144   0.144   0.144
                                       1.144    1.309    1.497    1.712        1.959      2.240       2.563      2.932   3.353   3.836   4.388   5.019
                             0.000
PV(growth*AROE)                         0.03     0.03     0.02     0.02         0.01        0.00       0.00       0.00    0.00    0.01    0.01    0.02
                                        1.03     1.06     1.09     1.10         1.11        1.11       1.11       1.11    1.12    1.12    1.14    1.15

(Assume this yr's AROE forever)         0.20     0.23     0.17     0.11         0.06        0.02      -0.02       0.01    0.03    0.06    0.08    0.11
(P/B if we stop est. this period)       1.23     1.29     1.25     1.21         1.17        1.13       1.09       1.12    1.15    1.18    1.22    1.26
                                        8.25     8.71     8.42     8.13         7.86        7.60       7.34       7.52    7.72    7.95    8.21    8.50


                                        6.01     7.07     8.35     9.76        11.33      13.05       14.97      17.08   19.56   22.47   25.89   29.94
                                        1.06     1.28     1.42     1.56         1.73       1.91        2.11       2.48    2.91    3.43    4.05    4.79
                                                0.208    0.106    0.106        0.106      0.106       0.106      0.172   0.175   0.178   0.181   0.184
Inputs:

      1. EPS Forecasts are $1.06 for FY1 and $1.28 for FY2. The long-term growth rate (LTG) is 10.55%.
         EPS forecasts and long-term growth rate (LTG) are from Reuters (10/13/05).
      2. Book value per share derived from Reuters (10/13/05) based on annual figures on balance sheet.
         Total Equity (2,228.2 million) divided by Total Outstanding shares (371 million) to give a book value
         of $6.01.
      3. Discount rate: Used 20 year T-bond rate of 4.71% as risk-free rate, an expected market rate of 9.5%,
         and ET’s beta of 2.02 (Reuters) producing a CAPM discount rate of 14.39% [0.0471+2.02(0.095-
         0.04710].
      4. Dividend payout ratio was 0.00% as reported by Reuters.
      5. Next fiscal year-end is December 2005.
      6. Current fiscal month is 10 (October).
      7. Target ROE=16.01%, the lagging 5 year industry ROE as reported by Reuters.

Output and Sensitivity Analysis:
   1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO
       valuation is $8.50.
   2. Changing the discount rate to 10.70% (-3.69%) give the EBO valuation of $15.95.
   3. Changing the growth rate to 15.80% (+5.25) pushes EBO valuation up to $9.65. Changing the
       growth rate to 5.25% (-5.30%) pushes EBO valuation down to $7.55.
   4. Changing the industry ROE to 24% (+8.00%) pushes EBO valuation up to $14.60. Changing the
       industry ROE to 8% (-8.01%) pushes EBO valuation down to $3.69.

By using the intended discount rate of 14.39%, the EBO valuation model yields a value that is substantially
lower than the current stock price. This implies that E*Trade’s stock is overvalued. Moreover, from the
sensitivity analysis it is clear that the stock price is more sensitive to the changes in discount rates and industry
ROE, than to changes in growth rates.




                                                                                                                                                     4
II. Relative Valuation
Comparables
                                                                            Mean FY2
                                                                         Earnings Estimate    Forward    Mean LT      PEG       P/B     ROE         Value
    Ticker    Name                          Mkt Cap      Current Price   (next fiscal year)    P/E      Growth Rate            (MRQ)    5 yr ave    Ratio     P/S
1   AMTD      Ameritrade Holding Corp.       8,713.13        19.53             0.87            22.45       7.23%       3.10     5.64    -0.86%      -6.56      7.88
2   SCH       Charles Schwab Corp.          19,732.10        13.13             0.67            19.60      12.14%       1.61     3.96    9.57%        0.41      4.18
3   JPM       JP Morgan Chase & Co.         120,058.15       34.08             3.37            10.11      10.18%       0.99     1.14    8.90%        0.13      2.97
4   GS        Goldman Sachs Group Inc.      58,705.52       114.55             10.96           10.45      12.50%       0.84     2.01    16.39%       0.12      1.50


    ET        E*Trade Financial Corp.        6,500.33        15.94             1.27            12.55      10.55%      1.19     2.60     4.30%       0.60      2.80


              Implied Price based on:                                                          P/E                    PEG       P/B                 Value     P/S
1   AMTD      Ameritrade Holding Corp.                                                        $28.51                  $41.60   $34.58              -$172.89   $44.86
2   SCH       Charles Schwab Corp.                                                            $24.89                  $21.63   $24.28              $10.91     $23.80
3   JPM       JP Morgan Chase & Co.                                                           $12.84                  $13.31   $6.99                $3.38     $16.91
4   GS        Goldman Sachs Group Inc.                                                        $13.27                  $11.20   $12.32               $3.23     $8.54


              High                                                                             $28.51                 $41.60   $34.58              $10.91     $44.86
              Low                                                                              $12.84                 $11.20   $6.99               -$172.89   $8.54
              Median                                                                           $19.08                 $17.47   $18.30               $3.30     $20.35




Indicator                                                                    Interpretation
P/E                                      Neutral-ET’s’ P/E is lower than its main competitors AMTD and SCH. In the same it
                                         is higher by roughly 2.00% than JPM and GS. This means that ET is either slightly, (1)
                                         overvalued, or (2) has higher expected growth, or (3) has lower risk.

PEG (P/E/G)                              Neutral- ET falls in the middle between its competitors. This means that ET is either
                                         undervalued, or is riskier.

P/B                                      Neutral-ET has substantially lower P/B than its main competitors, which shows a
                                         bullish signal. However, ET’s P/B ratio is also higher when compared to the two of the
                                         industry’s leaders, which shows a bearish signal. This also means ET might be either,
                                         (1) overvalued, or (2) has higher ROE, or (3) has smaller risk.

Value (P/B/ROE)                          Bearish- ET has the highest value ratio among its competitors. This means that ET is
                                         either overvalued, or has potentially lower risk.

P/S                                      Bullish- ET has second lowest P/S ratio, which means that ET is either undervalued,
                                         or has lower profit margins, or is more risky, when compared to competition.

Summary                                  In comparison to competitors E*Trade is substantially overvalued and has higher risk,
                                         as shown by the P/E, P/B, and the Value ratios. Moreover, ET has the lowest growth
                                         rate among its competitors, which shows that most likely the P/E and P/B ratios are
                                         driven by the lower growth and higher discount rates, and not by the ROE.




                                                                                                                                                                       5
III. Technical Analysis

Chart 1:       Bollinger Bands & Fast Stochastics




Chart 2:       Exponential Moving Average & MACD




                                                    6
Chart 3:          Linear Regression Channel & Price Rate of Change




Indicator                                                   Interpretation
Bollinger Bands        Neutral/Bearish-The last close price for ET was slightly below the MA. Currently there
                       are no indicators of whether the price will go up or down since ET falls between both
                       Bollinger bands and is not closer to either one.

Stochastics            Bearish- %K is lower than %D, and the gap between them is closing, which is a bearish
                       signal for the stock.
Moving Averages        Bearish- The stock price closed last week below its 25 and 50 day Moving Averages.
                       This is a bearish signal. However, the one day MA has an upward trend (means
                       bullish), whereas the 25 and 50 day MA have slightly downward trend (bearish).
MACD                   Bearish-Even though MACD line is positive, it is still below the signal line which
                       shows a bearish signal.
Regression             Neutral-The regression line is downward sloping, but not very steep. This is a bearish
                       signal. On the other hand the price is below the regression line, whish is a bullish
                       signal.
PriceROC               Bullish-The price is higher than it was 100 days ago, and it seems to be on the upward
                       side. This shows a bullish signal.




                                                                                                            7
IV. Earnings Analysis
                                             Earnings Surprises
                     June 2005         March 2005      December 2004       September 2004        June 2004
                     (Last qtr)       (2 qtrs prior)    (3 qtrs prior)      (4 qtrs prior)     (5 qtrs prior)
Estimate               $0.23              $0.24             $0.24               $0.18              $0.21
Actual                 $0.29              $0.24             $0.26               $0.21              $0.24
Difference              0.06               0.00              0.02                0.03               0.03
                                         Mean Earnings Estimates
                  September 2005     December 2005 December 2005     December 2006       LT Growth
                    This Quarter      Next Quarter This Fiscal Year   Next Fiscal            Rate
                                                                          Year
Earnings             $0.27             $0.28             $1.06            $1.27            10.55%
# Estimates            9                 9                 9                9                 4
                           Earnings Per Share Estimates Revisions Summary
                                              Last Week                         Last 4 Weeks
                                    Revised Up      Revised Down      Revised Up        Revised Down
Quarter ending 09/05                     0                 0                1                 0
Quarter ending 12/05                     0                 0                2                 0
Year ending 12/05                        0                 0                2                 0
Year ending 12/05                        0                 0                4                 0

E*Trade has experienced positive earnings surprises for over a year, except for the first quarter of current
fiscal year, when ET’s earnings per share were exactly what analysts had expected. The range of the surprises
are between two and six percent. These positive earnings surprises show companies ability to outperform
analyst expectations and create value for its stockholders.

Company is expected to have a multi-year high EPS for the current fiscal year that will end in December.
This is attributed to the fact that E*Trade just acquired HarrisDirect and is planning on acquiring BrownCo,
an online brokerage part of JP Morgan Chase and Co. According to the analysts, if the acquisitions go well
for E*Trade then the company should have a gain of 16.00% up to 21.8% percent on their EPS.

Over past four weeks E*Trade had nine positive revisions. This shows that market is expecting E*Trade to
do well in the future.




                                                                                                                8
V. Analysts’ Recommendations
                       Current                 1 Month Ago           2 Months Ago           1 Year Ago
Buy                       6                         6                     6                      6
Outperform                1                         1                     1                      3
Hold                      3                         3                     3                      0
Underperform              0                         0                     0                      0
Sell                      0                         0                     0                      0
No Opinion                0                         0                     0                      0
Mean Rating              1.7                       1.7                   1.7                   1.33

For the past three months analysts’ mean recommendation of outperform has stayed the same. However, it
is slightly different from one year ago when the mean recommendation was closer to buy, and there were no
hold recommendations or lower. This light downgrade is due to the fact that most of E*Trade’s competitors
are merging and acquiring different companies, whereas ET’s plans to merge with Ameritrade, one of its main
competitors, did not work out. According to the analysts, that was very bad news for ET, since the company
was left behind the competition and analyst were not sure if ET will be able to compete with its competitors
in this rapidly changing industry.




                                                                                                           9
VI. Institutional Ownership

                                   # of Holders      % Beg. Holders          Shares            % Shares
Shares Outstanding                                                         371,000,000         100.00%
Total Positions                         397              197.51%           268,327,850         72.40%

New Positions                           69               34.33%              N/A              #VALUE!
Soldout Positions                       54               26.87%              N/A              #VALUE!
Buyers                                  399              198.51%             N/A              #VALUE!
Sellers                                 203              101.00%             N/A              #VALUE!
Beg. Total Inst. Positions              201              100.00%           #VALUE!            #VALUE!

# Net Buyers/3 Mo. Net Chg.             196              97.51%            #VALUE!            #VALUE!

The net change in the buyers shows a bullish sign for the company. This means that institutional investors
believe that E*Trade is a good investment and expect companies stock to do well in the future.




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